During Drosophila eye development the control of cell proliferation and differentiation events are coordinately regulated by the movement of the morphogenetic furrow. The cdc25 phosphatase, string (stg) is expressed in an anterior stripe in the eye imaginal disc, where it was thought to contribute to the G1 synchronization of retinal precursors by promoting G2 to M progression. We have found that Drop (Dr) mutations are cis- regulatory alleles of stg that inactivate expression in the eye. In mutants lacking stg, mitosis ahead of the furrow was reduced, while retinal precursor cells within the furrow accumulated mitotic cyclins consistent with a cell cycle arrest in G2. Surprising, the lack of a G1 arrest in the mutants had no effect on the expression of Atonal, suggesting that the early events of pattern formation occur normally. Subsequent defects at a later stage of ommatidial assembly result in the recruitment of supernumerary photoreceptor cells. Expression of stg from a heatshock transgene was sufficient to rescue the extra R-cell phenotype of a viable Dr mutant. These results demonstrate a requirement for stg in both cell cycle progression and pattern formation during eye development. Previous genetic analysis of Dr mutations suggested that they affect two genes. We have cloned the stg/Dr region and identified two sites in the genomic DNA where RFLPs associated with Dr mutations were clustered. Lesions associated with the recessive lethality and eye phenotype mapped 30 and 60 kb upstream of the stg coding region. In order to map enhancer sequences required for expression in eye, putative control regions are being assayed in transgenic strains using lacZ reporter constructs. Insertion mutations associated with the dominant small eye phenotype of two Dr alleles were mapped to a second site 200 kb distal. Sequence analysis of ~25 kb genomic DNA flanking the insertion failed to reveal any significant open reading frames. The absence of transcripts in the region as assayed by Northern blot analysis, tissue in situ hybridization and cDNA library screening suggests that the region may correspond to cis-regulatory or non-coding sequences. Our data suggests that the dominant phenotype may be the result of multiple mutations which result in the frequent inactivation of cis-regulatory sequences in the stg gene.